Why The Market Is Performing This Way
Sep 15, 2011
I just wanted to post a small portion of my daily report that I sent out this morning before the open, because I thought it might give you a better idea baout why the market is performing in this manner. Look for the FSA acreage numbers to be out at 1:45pm this afternoon. Hope this helps.
I certainly don't want to be the guy that spoils the party, I am just getting more and more concerned about global demand and global supplies. Yes, here at home we are looking at a smaller crop, but the current corn prices justify more than this just a crop being reduced to 148 bushels per acre, you and I both know there are a ton of moving parts in play right now. It is of my opinion though in order to add another $1.50 or $2.00 to the price of corn we are going to need some serious help. The question is where does it come form? China is supposedly getting ready to harvest a record crop thought to be somewhere between 180 and 182 million tons and growing. Regardless of if the numbers are true or not, you still have to believe China waits to import any large quantities until a little later in the marketing year, or at least until they are able to absorb a large portion of their domestic harvest. Yes, there are arguments that Chinese producers may be inclined to hoard with prices in China at these extreme levels, but I doubt anything like that factors in until sometime in 2012, when supplies tighten up a bit more. In Argentina, the worlds second largest supplier of corn, they produced about 22 million metric tons last year, where as this year insiders are thinking they ended up producing some 27 million metric tons plus. With this data the Argentine government has just decided to release 7-8 million more tons of corn for exporting (as I reported yesterday). There is certainly nothing bullish to speak of coming from this front. In fact all of the reports coming out of South America seem to be talking about how many more corn acres they are going to plant next season in both Brazil and Argentina, certainly not bullish by any stretch. If you turn towards the Black Sea Region, once again nothing bullish to speak of. Sources in Ukraine are indicating they are definitely going to produce more corn than they had previously anticipated, and we all know what the onslaught of "feed wheat" from this region is doing to global corn demand. India has decided they will throw their hat in the ring and start export as well, and now Australia is talking about a bigger crop. Weekly ethanol data yesterday was the lowest in the past five weeks. My point is things may start getting a little more rocky. I have been saying for the past three or four weeks that you need to be getting everything sold that you are not comfortable storing. If by chance we run higher then we still have bushels left to sell. My fear is that we break and you are forced to sell at the lows of this cycle because you need the cash flow or don't have ample storage to carry it into 2012.
Sure we might pick up another $0.50 to $0.75 cents on fund repositioning or some other market variables. But if your waiting on a move to $8.50 or higher by year end you are essentially making a bet on one of three horses that are left in the 2011 Corn Derby:
- Horse #1- I will call her "Philly Freeze" - This horse is a winner if temps drop below 28F for any extended period of time during the next three or four weeks. She is not a come form behind winner, as the longer she waits to make her move in the race, the lower the payout. She needs to make her move early if she is going to pay off. One thing the crowd likes is that when she comes in she generally pays off in a big way, and her jockey is the best in the business (tough to get any better than the big man upstairs).
- Horse #2 - I will call her "Wild Acres" - She is a real beauty, young with very few races under her belt, but she has HUGE potential. If she gets the right start, has the right jockey, and is on a muddy track she could pay off big. Essentially by betting on "Wild Acres" you are thinking the USDA will cut harvested corn acres substantially. For a big pay-off you need a cut of 750,000 plus. With the FSA and USDA riding this youngster anything is possible, they may decide to let her run, or for the betterment of the sport pull her back and shut her down, you just never know. Definitely untested in the big races.
- Horse #3 - I will call her "Official Ruling" - I have seen this horse run many times through the years, she can often be a crowd favorite early in the race, but in the end very rarely makes it into the winners circle. She is generally the most hyped in the field, but more times than not fails to deliver the big pay-outs. Some in the racing world even go as far as saying she is on the "take." I wouldn't go that far, I just think the crowd often places the expectations much too high for her to deliver. For this old girl to pay off big you will need to see the yields continue to fall. I would be inclined to guess the closer we get to 140 bushels per acre the larger the pay-out and the better her chances. Just remember there is no rhyme or reason to how this horse will run, I have seen the jockey take her out out of the gates strong only to see her ease back later in the race. I have also seen her pour it on down the stretch. This horse can make you extremely happy and extremely sad all in the same race, so be prepared for anything. Once again a lot depends on the jockey and the conditions of the track. Just don't count your chickens before they are hatched with this girl still in the race.
In my opinion these are the only three horses left in the 2011 Corn Derby at this juncture. China buying corn in any big quantity is out of the race; both of the South American horses are out of the race, as they are planting more corn acres and raising their exports as we speak; Russia and Ukraine are out of the race as well on larger than expected supplies; Canada is a scratch, with no real losses to speak of; Ethanol Production and Domestic Feed Usage didn't feel they had enough growth left in the tank to compete and are no real threat to win the race, so they pulled out as well.
I hope you get my point. As the possibilities to win and the number of bets come off the board, we in turn need to be reducing the number of bets we actually have placed. Once the venue changes, more horses enter the field, and things start to heat back up we can always look at placing more bets. I just don't want to see you bet the farm when the odds of the game have changed so drastically in the past few weeks. Right now all that is left are three very unpredictable long-shots. Yes, there is certainly potential that one of these three horses could come in and pay off big, but there is also a strong chance that neither of them finish the race. I like betting on the long-shots just as much as the next guy, but the key to winning is knowing how much to bet, which horse to bet it on, and in which race. As with any type of gambling or speculation "risk-management" continues to be the most important tool.
The reason I am pointing this out is because right now you are walking up to the window at the track and placing your bet on one of these three horses. I would be very apprehensive right here betting it all on one of these three horse in this particular race. Maybe if you want to throw a few bushels at a possible "trifecta," I can understand, just be careful betting the entire farm. Make your sales, place a few bets on the long-shots and enjoy the remainder of the race. As a good buddy of mine said, trading a "weather market" and the "growing season" is like running a 50 yard dash, after it is over and for the remainder of the year we are back into a marathon, enduring the ups and downs of every hill and valley in this very long race....
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